Tuesday 29 May 2012

Eurogeddon - the end-game has begun


More bail outs then. This time Spain. Then Italy, Portugal, Eire. Then France. That's assuming they've already written Greece off.


Thing is, if you have any personal money in Greece, in Euros. you now face the prospect of a devaluation and probably reintroduction of the Drachma at 50% of the Euro value. And since you won't want to lose 50% of your money overnight, you'll be wanting to move it to a safe location.


But you can't have it in cash because the banks only hold around 2.7% of the actual 'folding' that would be needed to pay out what people (think they) own.


So you'll transfer your balance to Italy maybe. But the Italian banks will only credit that amount if they're sure that the credit transfer is sound - i.e. the money will be honoured by the Greek bank making the transfer. I'm not sure that they would see this as being real. Greece is insolvent.


And anyway, the same situation will be facing Italy in a matter of a few weeks, so they will be trying to get their money out too. Spain is no different and nor, ultimately, is France which, although it has been very quiet in recent months, Monsieur Holland will be nationalising a major French bank in the next month or so - he has no choice.


You'll recall the 'run' on the bank that we saw at Northern Rock, with queues of people wanting their money out - which was when the UK Government had to step in and nationalise the bank. Only this time it will be on a much bigger scale. Not a relatively small UK bank, but whole countries including Italy, Spain, Portugal Eire, and France. 


There is now a serious prospect of wheelbarrows being a good investment - to carry round the banknotes needed to buy a loaf of bread.


The politicians continue to believe that they can continue to extend lines of credit - in effect, print more and more money (presumably forever) in order to stop this contagion. But with asset values tumbling and 97.3% of Europe's money to be 'found' (i.e. it doesn't exist) this would be impossible. And would, in any case, make the Euro virtually worthless as a hard currency. 


It looks like Germany has already decided that there is no value in throwing more good money after bad. They have no prospect of ever getting it back and yes, the IMF which has famously never lost money in the past, is almost guaranteed to do so this time, just on Greece, let alone the bigger countries' debts. 


But the Eurocrats are faced with losing everything - including their cushy jobs if the whole thing fails and they will, therefore, do anything to try to keep 'kicking the can down the road' in the hope that 'something will turn up'. But it won't. It can't. And the figures are astronomical. Europe's GDP is bigger than the US. Europe is effectively bankrupt and Germany will bankrupt itself if it tries any further to stem the inevitable tide of default and unpayable debt. 


In Greece, the organisations which step in when a country goes bankrupt, in order to provide a softer landing post disaster, are already holding the assets they would normally be taking over in a crisis. So they're already part of the meltdown and not able, therefore, to provide any sort of bail-out.


The prospect of civil unrest (and believe me it will be anything but 'civil') is now becoming almost inevitable. And we now live in a world where even talking about rising extremism is not the done thing.  The atmosphere is now ripe for extremism to not just grow, but potentially take over as Governments are virtually powerless to intervene in any way that would be acceptable to their populations.


So we're no longer talking about a few 'ineffectual muppets' in Brussels that might spend too much money on themselves but don't really do that much harm. We're talking about a clear and present danger of the whole European edifice falling apart because of their failure to keep to their own rules of membership in the first place. Their own unwavering desire to create a united states of Europe, even though fundamentally, it could never work without true political and financial union.


It's a busted flush, but because the leaders have everything to lose if it fails, they will continue to do almost anything to cling on to the prospect of them keeping their jobs. No matter what it costs their citizens either financially or in terms of lifestyle, employment and security.   


And there's no 'big brother' waiting in the wings to lead us out of this catastrophe. The leaders are all, already embroiled in the problem. 


It's coming. As night follows day. Best case scenario would be for the Euro to fail quickly so that we, and the markets could respond to a new world and then start to get on with what comes afterwards, ideally in as painless a way as possible while law and order still holds and gives us some chance of managing the change. 


It will certainly not be without pain nor without conflict, but if it happens quickly with Government apparatus still in place (just), it might just be possible to move forward with minimal violence and pressure on social cohesion and for a new system to emerge. The longer our leaders try to carry on and salvage something from the current shambles, the worse the disruption will be. 


As far as the UK is concerned, we will certainly not be immune to a systemic failure in Europe. It will have a significant negative impact on our own economy but as one of the world's financial powerhouses and as a country that does still have a strong (if small) manufacturing sector and a strong agricultural sector, we are massively better placed to survive this meltdown.


In the short term we will be a safe haven for investment and if we are nimble on our feet, we can take some advantages from the European crisis. Southern Europe will have an exchange rate advantage over us, but they'll be on their knees initially.  And German exchange rates will go through the roof - a singular Germany will have a currency that is 50% higher valued than it is now, when yoked to the rest of Europe, so we'll likely be much more competitive in relation to our biggest rival. Again, this will call for  an ability to be responsive and nimble, but there could well be some good news in the medium term for the UK. 


In any case we'll be able to sell our wheelbarrows. One hopes that we won't be selling too many of our other great export product - arms - to the new Europe.









  

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